2of 2A cradle for moving truck beds is moved Thursday Nov. 12, 2015 from the Forma Automotive area of the Toyota plant after the bed was put on the assembly line. Forma Automotive, owned by Rosa Santana, is Toyota's first Hispanic woman-owned direct supplier. Her company supplies Toyota Motor Manufacturing Texas with assembled Tacoma truck beds.Photo: WILLIAM LUTHER, Staff / San Antonio Express-News

Texas factories cut production growth by more than half this month as local executives warned the Trump Administration’s steel and aluminum tariffs will hike costs and squeeze profits this year.

The Dallas Fed’s index of Texas factory output fell to 12.7 points in March, down 15 points to its lowest level since last summer. It plunged alongside other readings of statewide manufacturing activity, including new orders, shipments and capacity utilization.

Texas manufacturers still put out more products than they did in February, but another production drop of that size next month could signal the start of a recession in Texas manufacturing that could lead to thousands of job losses this year, said Ed Egan, director of the McNair Center for Entrepreneurship and Innovation at Rice University.

“These types of declines in the index are extreme and only occur during recessions,” Egan said. “The tariffs are effectively a sanction against direct manufacturing activity.”

The decline in factory output growth comes less than two years after rising oil prices began lifting demand for oil-equipment and other metal products manufactured in Texas. During the oil bust, manufacturing in the state contracted during 11 out of 16 months between March 2015 and June 2016.

Factory bosses said the Trump tariffs, which went into effect last week, have created a new level of uncertainty about the year ahead, according to a Dallas Fed survey released on Monday.

“Our business had a sudden, dramatic change in outlook due to the new steel tariffs,” one primary metal manufacturer told the Dallas Fed. “We expect a wild, unpredictable ride as there are also large, negative and unintended consequences which will hurt us.”

Fabricated metal manufacturers said the tariffs could “severely” impact their business.

The Dallas Fed’s index of raw materials prices climbed to its highest level in almost seven years. Its index of new orders fell to 8.3 points in March from 25.3 points in February; shipments dropped to 9.3 points from 32.1 points; capacity utilization declined to 9.6 points from 19.6 points.

Nearly one in five Texas factories said their level of uncertainty has increased, the Dallas Fed said.

“We were in good territory, but we were still fragile,” Egan said. “This was a shocking report.”

Higher steel prices for manufacturers will ultimately raise the cost of pumping crude in West Texas oil fields, where local drillers have already seen inflation because of labor and equipment constraints.

Though new sand minds in the Permian Basin have helped ease costs on transportation and sand, labor costs are expected to rise 10 percent to 15 percent this year, while materials costs could go up 5 percent to 10 percent, as demand increases for drilling and hydraulic fracturing equipment, investors said.

Steel tariffs will likely hit oil field service companies and pipeline operators the hardest, but eventually those firms will raise prices on customers and ratepayers — the oil producers that extract oil and gas from the earth.

“And that’s off of what I would say area already pretty modest margins for the energy service sector relative to history,” said Neil Wizel, managing director at private equity firm First Reserve in Houston. “There was already upward pressure on service and labor costs and those announcements on tariffs aren’t likely to mitigate that.”

The cost of steel makes up about 10 percent of the capital expenditures needed to drill a well and bring it into production, said Toby Loftin, managing principal of BP Capital Fund Advisors in Dallas.

“That would raise the marginal cost of production,” Loftin said, adding that that “implies you’ll need a higher oil price.”

For a slew of upcoming pipeline projects needed to carry oil and natural gas from the Permian Basin, “it doesn’t stop the project, but it has an effect of a 5 to 10 percent increase in costs,” he said, noting steel makes up about 20 percent of the cost of a pipeline project.

U.S. oil prices dropped 33 cents on Monday to $65.55 a barrel in New York.

Energy reporter for the Houston Chronicle. Houston native. Former banking and finance reporter.

Prior to joining the Houston Chronicle, Collin Eaton covered the local banking and finance scene at the Houston Business Journal. Before that, he held internships at newspapers in Texas and Washington D.C., generally writing about business, money or higher education. He graduated from the University of Texas at Austin in 2011.